Economists and political economists since the founding of our discipline have been vexed by the question as to why some countries are rich while other countries languish in poverty. As I like to point out to student audiences, the book that synthesized knowledge and established the discipline was Adam Smith's An Inquiry into the Nature and Causes of the Wealth of Nations, and over the past few years perhaps the top book readership and wide critical discussion wise in the field was Daron Acemoglu and James Robinson's Why Nations Fail, and one of the most respected economists around is Esther Duflo and her approach to studying poverty and policies directed at the alleviation of poverty throughout the world. In short, we are still grappling with Adam Smith's problems and puzzles that he identified back in 1776. It is the question that drives us.

Unfortunately, the discussion seems to cycle between an emphasis on the extent of the market, or the capacity of the state; on the accumulation of physical capital, or improvements in human capital; on the good fortune of geographic location, or the path dependency of history --- OR, some interaction between these various factors. This is all well and good, and the discussion is certainly lively, but progress does appear elusive. Instead, there appears to be some iron law of intellectucal cycling when it comes to answering the fundamental questions of economic growth and development.

One of the constants is educational opportunities for the individuals (particularly children) in the developing world. Cut off from educational access, and the prospects for living a life out of poverty are bleak. But for the vast majority of thinkers this implies greater state intervention and budgeting to provide educational access to its citizens -- particularly the most vulnerable of those. If the region under investigation lacks the governmental capacity to provide schooling for its young, then a case is made for international aid to support public schools for the poor. This is that conventional presumption.

Pauline Dixon challenges this conventional wisdom in International Aid and Private Schools for the Poor (Elgar, 2013). Based on extensive field work, Dixon demonstrates how educational entrepreneurs are providing low cost and superior quality educational opportunities to the most vulnerable of populations in the poorest regions of the world, whereas the public school options are failing the children due to misaligned incentives and lack of knowledge that results from being immune from the competitive process. Her work should be widely read by anyone interested in these questions.

The Times Literary Supplement has just released their annual issue with the Best Books for 2013, and Pauline's book have received this honor. Congratulations to Pauline for this richly deserved honor.

Thanksgiving is actually my favorite holiday only because of the great memories I have from my childhood of the day, and the wonderful times that Rosemary has created for our family and friends on this holiday as an adult.

So I wish you and yours a wonderful holiday. And here is an old Freeman (1959) article on the first Thanksgiving that tells the story in terms of private property rights.

Fifty years after the death of US President Kennedy, some, such as Ira Stoll in JFK, Conservative, argue that by today’s standards he should be considered a conservative — especially on taxes. Kennedy was a tax cutter (the way President Reagan would be twenty years later) and that makes him a conservative. Is that so?

It is undeniable that Kennedy pushed for a sharp reduction of tariffs and duties on thousands of goods through The Trade Expansion Act of 1962. More importantly, he made the case for personal and corporate tax cuts saying they were (a) good for economic growth, (b) they would eventually pay for themselves, and (c) they were to be permanent and not “quick fixes.” At the time he was elected, the highest federal marginal tax rate on income was 91%, and the lowest was 20% (compared with 35% and 10% today). The corporate tax rate was 52% (35% today) and the capital gains rate 25% (23.8% today). I don’t know the income levels at which these rates cut nor if deductions and shelters were sufficient to reduce the effective rates, but it seems obvious that the federal income tax system was, on principle at least, very punitive. The Revenue Act of 1964 reduced the top income tax rate to 70% and the corporate rate to 48%.

Kennedy found resistance amongst left-liberal economists like John Kenneth Galbraith. Many Democrats didn’t want to give benefits to the rich and opposed any reduction of top tax rates. But many Republicans opposed the project as well on the ground that it would worsen the fiscal situation and have no positive effects on economic performance. “Frankly, we find Mr. Kennedy’s economic theories mystifying,” explained the Republican leader in the House, Charles Halleck (Stoll p. 138). Stoll notes that the Wall Street Journal was also skeptical (p. 134). Interestingly Paul Samuelson and Robert Solow favored tax cuts: “More can be done for confidence by expansionary policies — early tax cuts — than by any feasible alternatives” (p. 130). So why did two of the most prominent Keynesian economists of the time support Kennedy’s tax cuts proposal if this was “conservative economics”?

The 1950s and 1960s were the heyday of Keynesian economics. The issue for everyone was aggregate demand and current expenditure. Galbraith and others wanted to increase the deficit in order to finance higher public expenditures and thus increase aggregate demand. But Kennedy saw a reduction in taxation as a better way to achieve the same objective. A look at the basic Keynesian model explains why. The model describes current expenditure (E) as the sum of three purchases: household (C), business investments (I), and government (G). In addition, household purchase (C) is a function of after-tax income (Y-T), such that:

E = C(Y-T) + I + G

Therefore current expenditure (E) increases with after tax income (provided people don’t hoard the extra income available), business investments, and public expenditure. So it is perfectly acceptable for Keynesians in the 1960s to favor tax cuts in order to prop-up aggregate demand, especially if taxes are high to begin with. This explains why Kennedy favored cutting the top marginal rates because the rich would probably spend the extra net income rather than save it (it would have been different if the top marginal rate was at the level where it is today). “No doubt a massive increase in Federal spending could also create jobs and growth,” explained Kennedy, “but in today’s setting [i.e. very high tax rates], private consumers, employers, and investors should be given a full opportunity first” (p. 136).

Note that the US budget deficit didn’t worsen after Kennedy’s assassination (it was $4.8b in 1963 and remained around that level until 1967) and tax revenue increased in 1964 and 1965, which could tend to show that he was right in saying that the cuts would pay for themselves (this is in contrast to the Reagan years during which the deficit massively increased; but this is another debate).

It seems to me that the only way in which Kennedy could be seen as more conservative than, say, Galbraith is that he focused on household purchases (C) when Keynesian theory is also about investments (I) and public spending (G). In that sense, he was perhaps more an “underconsumptionist” (worried about too little consumption) than a pure Keynesian. But again, considering the tax rates at the time, this is no surprise. Perhaps one could argue that when tax rates are very high Keynesians and supply-siders agree on the positive effects of tax cuts. That maybe so.

Tyler Cowen linked to this economic job market paper by Raul Sanchez de la Sierra (Columbia University). And indeed it is an interesting project, and I strong agree this sort of reeach should be encouraged in our discipline (including the field work) even though the interpretation of the theoretical importance and the historical evidence on the importance of centralized states for economic growth and development is more contested than appreciated. Can someone tell me when the idea of fractured and decentralized states competing with one another resulting in the "European miracle" was replaced by centralized and formal state capacity theories of economic growth and development? Was there a memo to stop reading Eric Jones and Nathan Rosenberg respective discussions of the birth of modern economic growth that I didn't receive? Some evidence that suggests that the earlier theories about "how the west grew rich" were overturned? People certainly are reading a lot of Charles Tilly (and that is a good thing), but Jones and Rosenberg should be on that list.

States capacity is required for tax collection, but the emergence of property rights and their enforcement predate both the formal state and the establshment of a taxing authority. Tyler gives a nod to Franz Oppenheimer in his link --- Oppenheimer's The State was a classic discussion of the conquest origins of formal government. The state is violence, the state is war. At least that is one way to put it. But does that conquest theory of the origins of the state undermine or support the state as essential for modern economic growth hypothesis?

An alternative hypothesis is that rules that enable individuals and groups to realize the gains from social cooperation under the division of labor can arise outside of the formal apparatus of the state, and be supported through a diversity of institutional arrangements. I already linked to my close colleague Dragos Paul Aligica's new book on Institutional Diversity and Political Economy, but today I was pointed to (ht: Angel Martin) to a new project among younger scholars in Europe focusing on the question of institutional design and institutional diversity influenced by Douglass North, Avner Greif, and Elinor Ostrom.

Many years ago I edited a volume for NYU Press, The Collapse of Development Planning (1994), which includes some fantastic essays contrasting the decentralized and diverse institutional path to development in Europe, with the centralized and orchestrated efforts to construct development in India, Asia, Latin America, and Africa. Though the book was published in paperback and widely available at that time, it has since seemingly disappeared from the world of ideas. But while that particular book failed to leave the impression desired when it was conceived, there have been a variety of efforts to assess the ideas of top down versus bottom up development (think Easterly) as well as the economic role of the state in human affairs (think pretty much everything that Ed Stringham or Peter Leeson has written over the past decade). Development with, or without, the state is a major theme of our working group in comparative political economy at GMU, see, e.g., the special issue of the RAE 25 (1) 2012 on James Scott's The Art of Not Being Governed.

This week the annual Society for the Development of Austrian Economics (SDAE) will hold its annual meeting in conjunction with the Southern Economic Association conference. Here is the schedule of panels for the SDAE/SEA meetings.

I look forward to seeing many old friends and making some new friends who share our commitment to view the Austrian School of Economics as an evolving and progressive research program in the social sciences.

Last week Paul Krugman told the world about a plot against France, as Standard and Poor’s downgraded the country’s bond rating to AA+. Bearing in mind that the public debt of most major Western countries will never be repaid, what agencies look at is the extent to which countries can service their debt.

But consider the following stylized facts for France in 2012:

Public debt represents more than 90% of GDP.

Annual interest payments alone (i.e. less than debt servicing since it does not include repayment of principal) amount to the entire receipts of the income tax (and it’s been that way for more than a decade).

Tax revenues amount to 46% of GDP (while total revenue, which includes the receipts of government-owned corporations is higher).

Public expenditure represents 56% of GDP.

Public deficit reaches almost 5% of GDP (while it is supposed to be no more than 3 % under EU rules).

Most of the increase in public spending since the 1960s is due to social transfers and debt servicing. In other words, the welfare state has been financed through debenture. And the trend continues. Commentators such as Veronique de Rugy have argued that Krugman is wearing rosy glasses. Even Philippe Aghion from Harvard, who is not known for being a free marketeer, criticized Krugman in a recent column in Le Monde. The idea that Krugman is mistaken, misguided, and misled by his Keynesian deficit-spending-creating-wealth-view is hard to deny. But what strikes me here is how far he is from realizing what is currently taking place in France and in other European countries.

Just take unemployment in France (a topic he doesn’t talk about in his column), which is officially at around 11%, but is in reality (that is, once you remove all the subsidized jobs) perhaps 4 or 5 percentage points higher (and that’s without taking into account the bloated public sector). Youth unemployment is above 25%. Unemployment in Europe results mostly from labor market regulations and subsidies to idleness; and it has been structurally high since the 1980s (on average 2 to 3 points higher than in the US). The emotional and physical toll of unemployment on the population is immense. Far from being reassured that the welfare state will take care of them, French people fear the risks of being unemployed. It is always part of the conversation, even if you are highly educated — which also explains the brain drain.

Interestingly one sees more and more public intellectuals of all parties agreeing that the country is in dire straights and that something must be done rapidly to avert disaster. The fundamental question now is not only which reforms should be pursued, but also, how can the country be reformed? And this is an issue for most Western countries that are on the same path as France, including the US. Can the system of majoritarian parliamentary democracy enable social change on a vast scale? The French president François Hollande has just reached approval ratings below 20% and seems completely paralyzed. The population doesn’t know whom to trust anymore and where to go. The conservatives failed under Sarkozy and now the socialists, who had promised a new era for France, are failing even more. The French suffer from promise fatigue and do not know where to turn. Like in Greece, Spain and Italy, the population has lost its belief in the political class and its leaders.

As I stated in a post in 2012, Hollande is an insider, which means that the likelihood that he will engage in any meaningful reform is very small. Reforms are often the result of the combination of two factors: (a) the arrival of outsiders who have no interest in maintaining the status quo and (b) an external event such as an uncontrollable crisis that gives outsiders a chance to implement reforms. France and many European countries are on the verge of social implosion. The tax revolt in Brittany over the last few weeks is an example of the tensions that exist. It’s only a matter of time before things go really bad. To engage in the type of reforms France, Spain, Greece, Italy, the US, and many other countries around the globe need would require sacrificing short-term interest for long-term gains (the opposite of the dynamic of majoritarian parliamentary democracy). But who would be willing to do that considering what it takes to succeed in politics? Who would be willing to abandon deficit spending once in power, and then put the fiscal house in order? Not Hollande. Not Obama. Meaningful economic reform seems impossible before it happens. But let’s remember what James Buchanan used to say: “I am an optimist if I look backward, and I am a pessimist if I look forward.” That’s perhaps the only hope we have now for Europe: while theory shows that reform seems impossible, history proves that great leaders often emerge in times of despair.

Steve Horwitz wrote a post about this video by Hans Rosling, which is just brilliant. Hayek argued in The Road to Serfdom that government control over economic affairs isn't just control over the material side of life, but control over the means by which we often pursue the most sacred in our lives. Rosling, in this talk, shows how industry and commerce makes possible the things in life that improve the human condition.

This piece is by Wang Qingsong -- a Chinese artist. It is titled "Follow Him" (2010). Set in an academic library, the piece is supposed to relfect both the breadth of human consciousness, such that even if this lone academic had gained all the knowledge available in that room, he would only have gained a sliver of understanding the human condition. Some have interpreted it as depicting the futile task of the academic attempting to absorb the the knowledge mankind has accumulated through the years.

I don't react that way to the piece, I see it instead as invitation to inquiry for the scholar. Of course the more we know the more we know we don't know, but that is part of the excitement of being a lifetime learner. We take great pleasure in figuring things out, no doubt, but there are always more things to figure out, and our aids in that process of learning can come from the most unusual of places --- many in rooms such as this, but more often in the experiences outside of rooms like this, and in fact are responsible for the creation of rooms like this.

Here is Larry Summers -- no doubt a brilliant and powerful thinker -- discussing the intellectual importance of Stanley Fisher's macro course at MIT, and then the relevance of what was taught for steming the financial crisis of 2007-2008, and potential future financial crises. Finance, Summers argues, might be too important to be left to the financiers. I disagree with him almost at each stage of his argument. But disagreement isn't enough. Watch his talk:

Now discuss how you could counter his claims ...

HINT: this is a really smart man, who has a ton of practical experience at the highest levels of public policy making so catch phrases and oldy but goody one liners aren't going to work here at they might in some other setting. This requires putting on your 'big girl/guy' pants' as an economist and getting to work.

There has been a lot of talk since 2008 that economics as a discipline should be held responsible. And in the wake of these criticisms, that the standard curriculum should be adjusted. Of course, what is supposed to replace the boggeyman of "neoclassical" economics is often little more than a warmed over and updated version of Marx, Veblen and Keynes (modern Galbraitheanism since the earlier version didn't succeed).

The Guardian actually reports that what is absent from economic education is the ideas of Marx and Keynes and that instead students are taught to worshop the free market. Really?! I actually don't think these reporters have ever met a real free market economist, nor have they absorbed the theory of market failure that permeates textbook economics.

There have been silly initiatives -- Occupy Economics being one --- and serious initiatives to reform economic education. The INET project to impact basic economic education is one that should be seriously considered -- CORE (Curriculum Open-Access Resources in Economics). But among those resources, I hope they will consider as one possible alternative to standard textbook education the approach that Paul Heyne pioneered and which Dave Prychitko and I have continued to represent in The Economic Way of Thinking. This approach to basic economics represents the ideas of Armen Alchian, James Buchanan, Ronald Coase, Harold Demsetz, and of course F. A. Hayek. Now in its 13th edition, the book emphasizes that economics is about exchange and the institutions within which exchange takes place. An institutionally antiseptic theory of economic behavior is rejected in favor of an genuine institutional economics. (More advanced readers are recommended to read Institutional Economics: Property, Competition, Policies as well.)

Institutions matter because it is through institutions that the structure of incentives is established, and the relevant information for action is filtered.

James Buchanan spent much of his time since 2008 explaining how the economics of the Older Chicago School --- Knight, Viner, Simons (Friedman, Stigler and Becker as in Buchanan's rendering intermediate cases between the Old and the New) --- was full of institutional analysis, whereas the New Chicago School of Lucas and Sargent as well as Fama was relatively weaker in this regard. The New Chicago School stressed market efficiency under any conceivable set of circumstances, rather than a product of various alternative institutional arrangements.

So my question to INET and CORE -- will the sort of 'genuine institutional economics' that Alchian, Buchanan, Coase, Demsetz, and Hayek advocated in their scientific careers be part of the reformed curriculum, or will it get mischaracterized as part of the neoclassical textbook because of some prior commitment to rejecting all theories that appear to place greater weight on the power of the market economy to guide resource use and reconcile conflicts than political mechanisms with the problems of the vote motive, bureaucracy, and rent-seeking? In studying the race between erring entrepreneurs and bumbling bureaucrats, it seems very important to keep in mind how the different ecology of decision making in each of the realms will impact the incentives and information that decision makers will face.

Institutions do in fact matter, and economics must account for institutions. But saying that doesn't fix economics. We must give our students a framework for studying comparative institutional arrangements. And in the history of our discipline, that requires studying more Adam Smith, and the ideas of those who sit in the seat of Adam Smith.